How Corruption Mitigates the Effect of FDI on Economic Growth?

Abstract

Unlike previous studies in the foreign direct investment-economic growth literature, this study uses the panel vector autoregressive (PVAR) model to examine the role of corruption in inhibiting the effect of foreign direct investment on the African economic growth. Furthermore, we use the impulse response function tool to better understand the reaction of economic growth, after shock on foreign direct investment, and the interaction between foreign direct investment and corruption. Using data over the period 1996–2016, this research results show that the foreign direct investment promotes the African economic growth. While corruption mitigates this effect, therefore, the implications of this paper are that public policies should aim to minimize the level of corruption in order to ameliorate the attractiveness of FDI and ensure its efficient utilization in order to give strength to the level of economic growth.